Fund of Information

Money-Market Compromise?

Money-market reform is in the hands of another set of regulators now, including Treasury Secretary Tim Geithner and Federal Reserve Chief Ben Bernanke. But it's Charles Schwab that's publicly changing the conversation.

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The debate over money-market reform has been one long, ugly slog, and it's far from over. But the conversation is changing.

After the SEC failed to garner enough internal support to bring its proposal to a vote, its chairman and money-fund bogeyman, Mary Schapiro, essentially tossed the hot potato to the Financial Stability Oversight Council. Created by Dodd-Frank, FSOC (pronounced f-sock) is made up of representatives from all of the financial-regulatory bodies. Its proposal, announced Nov. 13, looks suspiciously like the SEC's, involving a floating net asset value and capital requirements. FSOC is headed by Treasury Secretary Timothy Geithner, and Fed chief Ben Bernanke is a member; both have been vocal in backing money-fund reform.

The fund industry's lobbying arm, the Investment Company Institute, immediately responded that the proposal "failed to advance the debate over how to make money-market funds more resilient in the face of financial crisis" and that "ICI and its members continue to oppose these reform concepts."

It's worth noting, however, that the FSOC's cross-agency heft does allow it to think—and act—a little more creatively than the SEC. For instance, the regulators acknowledged the problem of recording thousands of minuscule capital gains and losses that would be incurred as individuals and institutions wrote checks and moved funds around. Its solution: to direct the Internal Revenue Service to come up with a solution, allowing for "administrative relief for both shareholders and fund sponsors" in terms of calculating basis and other tax matters, like the wash-sale rule. But the "let's get this done" tone has been largely ignored. "Money funds feel backed into a corner," says Pete Crane, publisher of the eponymous and ubiquitous Crane Data. "For them, this is life or death."

That is, until Charles Schwab—which has $155 billion in money-fund assets and had been ardent in its opposition to any money-fund reform—publicly called for compromise. CEO Walt Bettinger put forth the firm's proposal in an op-ed piece in The Wall Street Journal (published by Dow Jones, as is Barron's). "The money-fund issue is indicative of the broader issues facing our country," Bettinger tells Barron's. "Someone has to take a step forward."

Schwab's proposal delineates the risks inherent in money funds: "breaking the buck," when the net asset value falls below $1 per share, and a run, in which investors yank too much money out too quickly. Both risks, Bettinger says, are much higher in so-called prime money-market funds, which invest in a wide array of government, corporate, and international securities, than they are in money funds that invest exclusively in federal and state-government notes. The latter funds, according to Schwab, should be left alone, while prime funds should be regulated, according to how much institutional money they hold, since it's institutions that are most likely to react quickly and cause a run.

Treating prime funds differently than government-only funds is legitimate and shouldn't be hard to implement. Distinguishing between institutional and retail money is trickier, as even Schwab acknowledges. The proposal is light on details, which has emboldened some critics to note that Schwab has very little in the way of institutional money, compared with money-fund kingpins JPMorgan, Federated, Fidelity, and others.

Bettinger bristles at the notion that his proposal would be less onerous for Schwab than for other firms. "That's a complete smoke screen, put out by someone who wants to discredit our compromise," he says, adding that almost half ($762 billion) of Schwab's $1.9 trillion in assets are managed by registered investment advisors, who manage their clients' money en masse. "If there's a problem, an RIA isn't going to move just one customer's money; he's going to move all $100 million that he has power of attorney over," Bettinger says. "That would likely fall under the definition of institutional money."